HLL expects demand in rural India to boost profit

NEW DELHI: Hindustan Lever Ltd, India’s biggest maker of household products, expects rising incomes in the nation’s small towns and villages to spur demand for its costlier brands, boosting profit.

The company expects consumers in rural areas to upgrade from brands such as less-expensive Breeze soap to Lux and from Wheel detergent to Surf as economic growth leaves them with more cash to spend, Finance Director D. Sundaram said in an interview in Mumbai, where the company is based. He didn’t give profit or revenue forecasts.

A price war with the local unit of Procter &amp; Gamble Co. and higher raw material costs have eroded Hindustan Lever’s profit margin, making the stock the worst performer on the Bombay Stock Exchange’s Sensitive index in the past year. Hindustan Lever, which had its slowest profit growth in six quarters, may stock more of its expensive brands of detergents, toothpastes and soaps in the 6.3 million outlets it has access to across India.

“If farmers have more money, they will change consumption habits and start buying more expensive items,” said Pauli Laursen, who manages $700 million (Rs3,086 crore) of emerging-market equities at Sydinvest Asset Management in Aabenraa, Denmark, including Indian stocks. An improvement in Hindustan Lever’s profit margin may take three to four years, he said.India’s economy is forecast by the government to grow for a second successive year at 9% or more.

Margin

The company’s margin on earnings before interest, tax, depreciation and amortization shrank to 15.1% in 2006 from 21% in 2003, according to Man Financial Sify Securities India Ltd. Profit in the fourth quarter before one- time gains and charges rose 10%, while sales grew 6.2%, the slowest pace in two years.

The local unit of London- and Rotterdam-based Unilever sells a 100-gram pack of Breeze soap for Rs8, compared with Rs14 for a 100-gram pack of Lux. A 460-gram pack of Wheel detergent costs Rs10, compared with Rs41 for 500 grams of Surf Excel Blue.

Between March 2004 and March 2005, Hindustan Lever was locked in a price war with Procter &amp; Gamble India. Both companies started raising prices as raw material prices climbed. Last year, Hindustan Lever increased its advertisement expenditure, spending 10.5% of sales to promote its brands, compared with 9% the previous year.Unilever, which first started selling its Sunlight soap bars in India in 1888, owns 51.5 % of Hindustan Lever.

Demand for products such as toothpaste and deodorants in the nation’s villages will rise 60% to Rs740.2 billion, New Delhi-based industry group Associated Chambers of Commerce &amp; Industry of India said in December. About 60% of all household and consumer products will be consumed in villages, it said.

“The type of exposure rural masses are getting through advertisements on television is driving aspirations,” said Naresh Kumar Garg, who manages the equivalent of $54 million in local assets at Sahara Asset Management Co. “Disposable incomes are increasing and people tend to buy more expensive products.”

India’s farm production grew 6% in the year ended 31 March 2006, after being stagnant the previous year. Prices for immediate delivery of chickpeas have risen 24% in the past 12 months on the National Commodity &amp; Derivatives Exchange, while corn surged 35%.

Rural Incomes

“There are reasons to believe rural incomes are holding well and rural growth continues to be robust,” Sundaram said.India doesn’t provide per-capita income data for rural and urban dwellers separately. Per-capita income is estimated to rise to Rs29,609 in the year ending 31 March from Rs25,716 a year earlier.

Hindustan Lever expects incomes of farmers to accelerate further as more companies such as Reliance Industries Ltd. purchase produce directly from them, giving them a higher price. Reliance plans to open more than 1,000 grocery stores by the end of this year and as many as eight hypermarkets.Farmers are also getting better prices by signing contracts with companies such as PepsiCo Inc. for rice and potatoes.

“Many of the retail majors tend to procure directly” from farmers, Sundaram said. “With proper infrastructure, the farmers’ income levels will rise. The fast-moving consumer goods industry is poised to benefit from it substantially.”Hindustan Lever gets about 4% of its annual revenue from sales through organized retail networks.

Improvement of rural roads and the availability of electricity is also expected to raise incomes and demand. India started its four-year Bharat Nirman, or Building India, project in 2005 with the target of connecting all the villages in the country with roads, telephone services, power supply and water.

The government built 18,053 kilometers (11,220 miles) of new roads in the year ended 31 March 2006, exceeding its target. As many as 29,591 villages, which did not have power, have been supplied with electricity as of 9 February 2007, according to the government’s Website.